lawyers in India

Mergers in India

Written by: Viplaw Kashyap - Persuing Law in Symbiosis Law School
Law of WIll
Legal Service
  • Merger is a tool used by companies for the purpose of expanding their operations often aiming at an increase of their long term profitability. Usually mergers occur in a consensual (occurring by mutual consent) setting. The dictionary meaning of Mergers is to combine commercial or industrial firms or to lose identity by being absorbed in something else.

    However the Companies Act, 1956 does not define the term 'Merger' or 'Amalgamation'. It deals with schemes of merger/ acquisition which are given in s.390-394 'A', 395,396 and 396 'A'.

    In common parlance, the terminologies Amalgamation or merger would mean the two business entities joining together to make totally new business entity or to allow one business entity to survive absorbing the other one. Amalgamation or merger is also a method of reconstruction. In amalgamation, two or more companies are fused into one by merger or by one taking over the other. When two companies are merged and are so joined as to form third company or one is absorbed into other or blended with another, the amalgamating company loses its identity. There may be amalgamation either by transfer of two or more undertakings to a new company or by the transfer of one or more undertakings to an existing company. An amalgamation may be defined as an arrangement where by the assets of the two companies which has as its share holders all, or substantially all the share holders of the two companies.

    But they differ in this regard that amalgamation is a used where two or more companies are there but merger is when one company is blended with another.

    Classifications of mergers

    Horizontal mergers take place where the two merging companies produce similar product in the same industry. A horizontal merger is when two companies competing in the same market merge or join together. This type of merger can either have a very large effect or little to no effect on the market.

    When two extremely small companies combine, or horizontally merge, the results of the merger are less noticeable. These smaller horizontal mergers are very common. If a small local drug store were to horizontally merge with another local drugstore, the effect of this merger on the drugstore market would be minimal. In a large horizontal merger, however, the resulting ripple effects can be felt throughout the market sector and sometimes throughout the whole economy.

    Witness the recent attempt by Staples, Inc., one "superstore" retailer of office supplies, to acquire Office Depot, another giant retailer of office supplies. In many areas of the country, the merger would have reduced the number of superstore competitors, often leaving Staples as the only superstore in the area. Evidence from the companies' pricing data showed that Staples would have been able to keep prices up to 13 percent higher after the merger than without the merger. The FTC blocked the merger, saving consumers an estimated $1.1 billion over five years.

    Vertical mergers occur when two firms, each working at different stages in the production of the same good, combine.

    Vertical mergers involve firms in a buyer-seller relationship -- a manufacturer merging with a supplier of component products, or a manufacturer merging with a distributor of its products. A vertical merger can harm competition by making it difficult for competitors to gain access to an important component product or to an important channel of distribution. This is called a "vertical foreclosure" or "bottleneck" problem.

    Take the merger of Time Warner, Inc., producers of HBO and other video programming, and Turner Corp., producers of CNN, TBS, and other programming. The FTC was concerned that Time Warner could refuse to sell popular video programming to competitors of cable TV companies owned or affiliated with Time Warner or Turner -- or offer to sell the programming at discriminatory rates. That would allow Time Warner-Tuner affiliate cable companies to maintain monopolies against competitors like Direct Broadcast Satellite and new wireless cable technologies. What's more, the Time Warner-Turner affiliates could hurt competition in the production of video programming by refusing to carry programming produced by competitors of both Time Warner and Turner. The FTC allowed the merger, but prohibited discriminatory access terms at both levels to prevent anticompetitive effects.

    Vertical mergers can further be classified into (a) Forward Integration and (b) Backward Integration. A recent example of the latter is Reliance purchasing FLAG Telecom Group. Reliance Gateway, a wholly-owned subsidiary of Reliance Infocomm, has signed an amalgamation agreement with Flag Telecom Group for this acquisition.

    Congeneric mergers occur where two merging firms are in the same general industry, but they have no mutual buyer/customer or supplier relationship, such as a merger between a bank and a leasing company. Example: Prudential's acquisition of Bache & Company.

    Conglomerate mergers take place when the two firms operate in different industries. It is the merger of two companies that have no related products or markets. In short, they have no common business ties. Such merger moves for diversification of risk constitutes the rationale.

    The completion of a merger does not ensure the success of the resulting organization; indeed, many mergers (in some industries, the majority) result in a net loss of value due to problems. For the merger not to be considered a failure, it must increase shareholder value faster than if the companies were separate, or prevent the deterioration of shareholder value more than if the companies were separate.

    Samir Dudhoria, Partner, Luthra & Luthra, mentioned reasons why M&A are necessary. He goes on to say that it leads to (a) Access to new markets and established customer bases, (b) Technology access and sharing, (c) Brand equity and diversification, (d) Acquisition of suppliers, (e)Synergies, (f)Economies of scale. Mohit Saraf, another partner, Luthra & Luthra remarks the underlying principles of M&A as 2+2> 4.

    Reconstruction: A corporate reconstruction can be divided as an exercise inyo internal reconstruction and external reconstruction. The exercise of corporate restructuring is as much legal exercise as it is a business exercise. They are also referred as internal arrangements and external arrangements.

    (A) Internal Reconstruction:- requires the corporate to make variations in the rights of the shareholders (as dealt by ss.106, 107) or reorganizing by buy-back or reducing the share capital (s.390(b)), at that given point of time.

    (B) External Reconstruction: - includes merger, amalgamation, de-mergers and provisions u/s.394 (b).

    The procedure for the amalgamation of two companies has to be viewed from the Transferor and Transferee Company. Steps to be followed by Transferee Company is:
    1. Memorandum Of Association (M/A):-
    The Memorandum of Association must provide the power to amalgamate in its objects clause. It M/A is silent, amendment in M/A must take place

    2. Board Meeting:-
    A Board Meeting shall be convened to consider and pass the following requisite resolutions:

    - approve the draft scheme of amalgamation;
    - to authorize filing of application to the court for directions to convene a general meeting;
    - to file a petition for confirmation of scheme by the High Court.

    Through an application under s.391/ 394 of Companies Act, 1956 can be made by the member or creditor of a company, the court may not be able to sanction the scheme which is not approved by the company by a Board or members resolution.

    Directors who are given the necessary powers by the AoA may present a petition on behalf of the company without first obtaining the approval of the company in general meeting.

    3. Application to the Court:-
    An application shall be made to the court for directions to convene a general meeting by way of Judge's summons supported by an affidavit. The proposed scheme of amalgamation must be attached to such affidavit.

    The summons should be accompanied by:

    A certified copy of the M&A of both companies

    A certified true copy of the latest audited B/S and P&L A/c of transferee company

    The application to convene meeting under s.391(1) is required to be made to the respective jurisdictional HC by the company concerned depending on the location of its registered office. Similarly an application for the scheme of arrangement will have to be made to the concerned HC where the company's registered office is situated.

    Person entitled to apply:- (i) U/s.391 & 394, members of the company have right to apply to court (ii) A successor to a share of a deceased member has in the normal course, locus standi to maintain an application u/s.391, 395.(iii) An application can also be made by the transferee of shares. (iv)The creditor also have right to apply to court. (v) The liquidator is also empowered to make an application to the court.

    4. Copy To Regional Director:

    A copy of application made to concerned H.C. shall also be sent to the R.D. of the region. Although, such notice is supposed to be sent by the H.C., usually the company sends it without waiting for the H.C. to send it.

    5. Order Of High Court:

    On hearing of the summons, the H.C. shall pass the necessary orders which shall include: (a) Time and place of the meeting, (b) Chairman of the meeting, (c) Fixing the quorum, (d) Procedure to be followed in the meeting for voting by the proxy, (e) Advertisement of notice of the meeting, (f) Time limit for the chairman to submit the report to the court regarding the result of the meeting.

    Where the court observes that any of the following circumstances exist in the case of the merger it may not order a meeting when shareholders are few in number; or where the membership is restricted to a single family, HUF or close relatives; or where shareholding pattern of transferor and transferee companies is identical.

    6. Notice Of The Meeting:

    The notice of the meeting shall be sent to the creditors and/or all the shareholders individually (including preference shareholders) by the chairman so appointed by registered post enclosing: (a) A statement setting forth the following:
    - Terms of amalgamation and its effects
    - Any material interests of the director, MDs or Manager, in any capacity
    - Effect of the arrangement on those interests.
    (b) A copy of the proposed scheme of amalgamation
    (c) A form of proxy, (d) Attendance slip, (e) Notice of the resolution for authorizing issue of shares to persons other than existing shareholders
    Computation: The notice that is required to be given u/s.393 of the Act for the meeting of the members/creditors shall be by 21 clear days notice.

    7. Advertisement Of Notice Of Meeting:

    The notice of the meeting shall be advertised in an English and Hindi Newspapers as the court may direct by giving not less than 21 clear days notice before the date fixed for the meeting. However in some instances, the 21 days period can be condoned if reasons are found justifiable.

    8. Notice To Stock Exchange:

    In case of the listed company, 3 copies of the notice of the general meeting along with enclosures shall be sent to the Stock Exchange where the company is listed.

    9. Filing Of Affidavit For The Compliance:

    An affidavit not les than 7 days before the meeting shall be filed by the Chairman of the meeting with the Court showing that the directions regarding the issue of notices and advertisement have been duly complied with.

    10. General Meeting:

    The General Meeting shall be held to pass the following resolutions: (a) Approving the scheme of amalgamation by ūth majority e.g. if a meeting is attended by say 100 members holding 100 shares, the scheme shall be deemed to have been approved only when it is supported by atleast 51 members holding together 750 shares amounts themselves; (b) Special Resolution authorizing allotment of shares to persons other than existing shareholders or an ordinary resolution be passed subject to getting Central Government's approval for the allotment as per the provisions of Section 81(1A) of the Companies Act, 1956, (c) The resolution to empower directors to dispose of the shares not taken up by the dissenting shareholders at their discretion., (d) An ordinary/special resolution shall be passed to increase the Authorized share capital, if the proposed issue of shares exceeds the present authorized capital. The decision of the meeting shall be ascertained only by taking a poll on resolutions.

    11. Reporting Of Result Of The Meeting:

    The Chairman of the meeting shall report the result of the meeting to the court within the time fixed by the judge or within 7 days, as the case may be. A copy of proceedings of the meeting shall also be sent to the concerned Stock Exchange.

    12. Formalities With ROC:

    The following documents shall be filed with ROC along-with the requisite filing fees:
    (i) Form No. 23 of Companies General Rules & Forms + copy of Special Resolution, (ii) Resolution approving the scheme of amalgamation, (iii) Special resolution passed for the issue of shares to persons other than existing shareholders.

    13. Petition:

    For approval of the scheme of amalgamation, a petition shall be made to the H.C. within 7 days of the filing of report by the chairman.
    If the Regd. Offices of the companies are in same state - then both the companies may move jointly to the High Court. If the Regd. Offices of the companies are in different states - then each company shall move the petition in respective High Court for directions. However in a recent judgment of Jaipur Polypin Ltd. v. Rajasthan Spinning & Weaving Mills, it was held that when the two companies are at different places, then no need to file an application at two different places.

    14. Sanction of The Scheme:

    The Court shall sanction the scheme on being satisfied that: (i) The whole scheme is annexed to the notice for convening meeting. (This provision is mandatory in nature)
    (ii) The scheme should have been approved by the company by means of ūth majority of the members present.

    (iii) The scheme should be genuine and bona fide and should not be against the interests of the creditors, the company and the public interest.

    After satisfying itself, the court shall pass orders in the requisite form. The requirement of law is permission or approval of court to the scheme. The application made by the company is to seek court's approval to the company scheme of amalgamation and not merely ordering a meeting. The court may order a meeting of members too. The court must consider all aspects of the matter so as to arrive at a finding that the scheme is fair, just and reasonable and does not contravene public policy or any statutory provision.

    While interpreting s.394 r/w s.391, we find that the Tribunal's power of ordering amalgamation/reconstruction is limited by two provisos of s.394: Firstly, Tribunal has to await the receipt of report from the Registrar of Companies about the manner in which affairs of the Company are conducted. Secondly, when the transferor company is proposed to be dissolved without winding up, the Tribunal shall await.

    15. Stamp Duty

    A scheme sanctioned by the court is an instrument liable to stamp duty.

    16. Filing With ROC

    The following documents shall be filed with ROC within 30 days of order:
    " A certified true copy of Court's Order
    " Form No. 21 of Companies General Rules & Forms

    17. Copy of Order to be annexed

    A copy of court's order shall be annexed to every copy of the Memorandum of Association issued after the certified copy of the order has been filed with as aforesaid.

    18. Allotment of shares

    A Board Resolution shall be passed for the allotment of shares to the shareholders in exchange of shares held in the transferor-company and to fix the record date for this purpose.

    Steps To Be Followed By Transferor Company:

    The procedure as given above shall be followed by the transferor company.

    The only exception is that - there is no need for the transferor company to pass a special resolution for offering shares to the persons other than the existing shareholders and to file Form No. 23 of the Companies General Rules and Forms with the Registrar of Companies.

    Mergers and acquisitions have gained importance in recent times. Business consolidation by large industrial houses, consolidation of business by multinationals operating in India, increasing competition amongst domestic companies and competition against imports have all combined to spur mergers and acquisitions activities in India.

    2006 will be remembered in India's corporate history as a year when Indian companies covered a lot of new ground. They went shopping across the globe and acquired a number of strategically significant companies. This comprised 60 per cent of the total mergers and acquisitions (M&A) activity in India in 2006. And almost 99 per cent of acquisitions were made with cash payments.

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